Week 5 Homework Assignment
Patricia A. Harris
January 31, 2011
Sandra Whittaker-Byrant
APPENDIX 2
FIN/571 – WEEK 5 HOMEWORK
PATRICIA HARRIS – JANURAY 31, 2011
Ch. 17: Problem 1 - 2 PTS.
(Choosing financial targets) Bixton Company’s new chief financial officer is evaluating Bixton’s capital structure. She is concerned that the firm might be underleveraged, even though the firm has larger-than-average research and development and foreign tax credits when compared to other firms in its industry. Her staff prepared the industry comparison shown here.
FUNDS FROM
RATING FIXED CHARGE OPERATIONS/ LONG-TERM DEBT/
CATEGORY COVERAGE TOTAL DEBT CAPITALIZATION
Aa 4.00–5.25x 60–80% 17–23%
A 3.00–4.20 45–66 22–34
Baa 1.95–3.35 35–57 32–41
a. Bixton’s objective is to achieve a credit standing that falls, in the words of the chief financial officer, “comfortably within the ‘A’ range.” What target range would you recommend for each of the three credit measures.
Answer:
To stay within the “A” range, the firm needs to move away from the low end of the Fixed Charge Coverage and Funds from Operations/Total Debt ranges for a credit rating of Baa and move away from the high end of the Long-Term Debt/ Capitalization range. To achieve a credit rating that is in the range of A, Bixton will need to reverse what is current, by moving from both the high margin of the Fixed Charge Coverage and Funds from Operations/Total Debt ranges and the low end of the Long-Term Debt/Capitalization range. The target range that is recommended is the following:
Fixed Charge Coverage: 3.5 – 4.2
Funds From Operations/Total Debt: 42 – 62%
Long-Term Debt/Capitalization: 20 - 32%?
b. Before settling on these target ranges, what other factors should...